<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 0-27972
TREGA BIOSCIENCES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its charter)
DELAWARE 51-0336233
----------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9880 CAMPUS POINT DRIVE, SAN DIEGO, CA 92121 (858) 410-6500
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at March 31, 2000
---------------------------------- ----------------------------------
<S> <C>
Common Stock, $0.001 par value 19,604,377
</TABLE>
<PAGE>
TREGA BIOSCIENCES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at March 31, 2000 and December 31, 1999............ 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999.................................................. 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.................................................. 5
Notes to Consolidated Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 18
PART II. OTHER INFORMATION
Item 6. Exhibits....................................................................... 19
SIGNATURE.............................................................................. 20
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Trega Biosciences, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,017 $ 5,393
Short-term investments 996 1,041
Accounts receivable and other current assets 1,671 2,541
-------- --------
Total current assets 4,684 8,975
Property and equipment, net 4,389 4,179
Investment in affiliate, net of amortization 2,299 2,581
Other assets 6,889 6,926
-------- --------
$ 18,261 $ 22,661
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,147 $ 696
Accrued compensation and other accrued liabilities 2,436 2,867
Line of credit 1,500 1,500
Current portion of debt obligations 1,379 1,272
Deferred revenue 574 1,820
-------- --------
Total current liabilities 7,036 8,155
Long-term debt obligations, net of current portion 2,631 2,484
Deferred rent 579 512
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000
Issued and outstanding shares of 19,604,377 and
19,101,437 at March 31, 2000 and December 31, 1999,
respectively 20 19
Additional paid-in capital 89,738 89,067
Common stock issuable 16 16
Deferred compensation (356) (489)
Accumulated deficit (81,403) (77,103)
-------- --------
Total stockholders' equity 8,015 11,510
-------- --------
$ 18,261 $ 22,661
======== ========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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Trega Biosciences, Inc.
Consolidated Statements of Operations
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------ ------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Compound revenues $ 1,449 $ 365
Related party contract research 825 825
Contract research and other 277 840
Net sales 39 105
------------ ------------
2,590 2,135
Costs and expenses:
Cost of sales 35 59
Research and development 4,448 4,587
Selling, general and administrative 2,166 1,796
------------ ------------
6,649 6,442
------------ ------------
Loss from operations before equity in losses
of affiliate (4,059) (4,307)
Equity in losses of affiliate (186) -
------------ ------------
Loss from operations (4,245) (4,307)
Other income:
Interest income, net (55) 114
Gain on sale of ChromaXome Corp. - 1,513
------------ ------------
Net loss $ (4,300) $ (2,680)
============ ============
Basic and diluted net loss per share $ (.22) $ (.15)
============ ============
Shares used in computing basic and diluted
net loss per share 19,414 17,853
============ ============
</TABLE>
See accompanying notes.
4
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Trega Biosciences, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
--------- --------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,300) $ (2,680)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 603 459
Amortization of note receivable discount - (13)
Amortization of deferred compensation 133 165
Equity in losses of affiliate 186 -
Gain on sale of CXC - (1,513)
Changes in operating assets and liabilities, net of
effects from the transfer of assets from sale of CXC in
1999:
Accounts receivable 1,027 (659)
Other current assets (157) 99
Accounts payable 451 (745)
Accrued compensation and other accrued liabilities (429) 238
Deferred rent 67 83
Deferred revenue (1,246) (1,340)
---------- ----------
Net cash (used in) operating activities (3,665) (5,906)
INVESTING ACTIVITIES
Purchase of short-term investments (1,005) -
Maturities of short-term investments 1,050 2,366
Purchase of property and equipment (543) (170)
Net proceeds from sale of CXC - 1,705
Other assets (138) 133
---------- ---------
Net cash (used in) provided by investing activities (636) 4,034
FINANCING ACTIVITIES
Principal payments under debt obligations (325) (393)
Proceeds from equipment notes and notes payable 578 -
Issuance of common stock 672 45
--------- ---------
Net cash provided by (used in) financing activities 925 (348)
--------- ----------
Net (decrease) in cash and cash equivalents (3,376) (2,220)
Cash and cash equivalents at beginning of period 5,393 9,755
--------- ---------
Cash and cash equivalents at end of period $ 2,017 $ 7,535
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 109 $ 90
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
March 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Trega
Biosciences, Inc. (the "Company"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. For more complete information, these financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes thereto for the year ended December 31, 1999, included in the
Company's Form 10-K filed with the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
Net Loss Per Share
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share" requires the presentation of basic and diluted earnings per
share amounts. Basic earnings per share is calculated based upon the weighted
average number of common shares outstanding during the period, while diluted
earnings per share also gives effect to all potential diluted common shares
outstanding during the period such as those underlying outstanding options,
warrants and convertible securities and contingently issuable shares. All common
shares, outstanding options, warrants and convertible securities and
contingently issuable shares have been excluded from the calculation of diluted
earnings per share, as their inclusion would be anti-dilutive.
Comprehensive Income (Loss)
Statement of Financial Accounting Standard No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income" requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income and other comprehensive income,
including foreign currency translation adjustments and unrealized gains and
losses on investments, are required to be reported, net of their related tax
effect, to arrive at comprehensive income. For the three years ended December
31, 1999, comprehensive loss is the same as net loss.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to
the presentation for the three months ended March 31, 2000.
3. DEBT
LINE OF CREDIT
In August 1999, the Company entered into a line of credit in the amount of
$1.5 million that provided funds to be used primarily for working capital
purposes. The line of credit, which is secured by the general assets of the
Company, bears interest at prime plus .75% (9.0% at March 31, 2000) and is for a
term of one year. The line of credit contains covenants relating to cash flow
coverage and minimum cash balances. As of March 31, 2000, the Company is in
compliance with all debt covenants. In August 1999, the entire line of credit of
$1.5 million was accessed and $1.5 million remains outstanding at March 31,
2000. In connection with the receipt of the
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line of credit, the Company issued a warrant to the lender to purchase up to
20,000 shares of the Company's common stock at $1.75 per share. The warrant
expires on August 5, 2004.
LONG-TERM DEBT
In March 2000, the Company obtained an equipment financing line in the
amount of $600,000, of which the Company had accessed approximately $578,000 by
March 31, 2000. The loan, which is secured by certain of the Company's
equipment, bears interest of 13.337% and is to be repaid monthly over a
four-year term.
In connection with certain equipment financing lines, the Company must meet
certain financial covenants pertaining to the amount of its cash and marketable
securities to be maintained during the terms of the financing. Due to certain
covenant violations, the Company has provided required security deposits and
therefore has fulfilled its obligations related to the covenants. The security
deposits are included in other assets in the consolidated balance sheet.
4. COMMON STOCK
During the three months ended March 31, 2000, the Company issued 502,940
shares of common stock upon the exercise of options and warrants and as a result
of participation in the Company's employee stock purchase plan, which shares are
included in common stock outstanding at March 31, 2000.
5. SUBSEQUENT EVENT
In April 2000, the Company sold 3.7 million newly issued shares of its
common stock to selected institutional and other accredited investors for net
cash proceeds of approximately $10.1 million ("the Equity Financing"). In
addition, the Company agreed to grant a warrant to the placement agent for the
Equity Financing to purchase up to 220,000 additional shares of common stock
at an exercise price of $5.375 per share.
In addition, Trega obtained an additional equipment financing line of $1.4
million in April 2000. To date, the Company has not accessed any of this
additional line of financing. Once the financing line is accessed, the loan will
be secured by certain equipment and will be repaid over a four-year term.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL,"
"EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND
SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES (INCLUDING THOSE SET FORTH BELOW, IN THE SECTION OF THIS ITEM 2 OF
THIS QUARTERLY REPORT ON FORM 10-Q UNDER THE CAPTION "RISK FACTORS" AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999) THAT
COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE
BASED.
OVERVIEW
Trega Biosciences, Inc. (the "Company," "Trega," "we" or "us" or "our") is
focused on accelerating drug discovery from disease targets to clinical
candidates through its iDiscovery-TM- technologies. Such technologies include
(i) the IDEA-TM- (In Vitro Determination for the Estimation of ADME (absorption,
distribution, metabolism and excretion)) computerized predictive models for,
among other things, the prediction and selection of compounds with essential
drug-like characteristics for further development and (ii) Chem.Folio-Registered
Trademark- combinatorial libraries for screening and optimization of potential
drug candidates.
Since its inception, Trega has utilized combinatorial chemistry as a
foundation for its drug discovery activities: first, for the production of
peptides, then mixtures of small molecules, and finally, for singles-based
compound arrays. This technology has enabled Trega to develop and offer a wide
range of small-molecule libraries, including its Chem.Folio-Registered
Trademark- compound libraries, which are constructed in singles-based compound
arrays. In 1993, Trega used its combinatorial chemistry technologies to discover
a family of proprietary compounds that appear to influence the production and
activity of certain cytokines through interaction with melanocortin receptors.
These compounds include HP-228, which has competed a Phase II clinical trial in
the treatment of post-operative pain in hip and knee replacements. As part of
its activities, the Company formed collaborative partnerships in the area of
drug discovery and development. Coinciding with this focus, Trega entered into
collaborations with certain pharmaceutical companies to develop compounds active
against certain melanocortin receptors.
The continuing development of Trega's combinatorial chemistry libraries led
to the development of information relevant to the drug discovery process, which
information was regularly supplied to library purchasers. The development of
this information and a growing belief in the importance of information in the
drug discovery process caused the Company to investigate opportunities to
acquire technologies directed at creating information germane to the drug
discovery process. In 1998, Trega acquired its wholly owned subsidiary,
NaviCyte, Inc. ("NaviCyte"), whose business included the development of products
and services to facilitate the rapid screening of compounds for pharmacokinetic
characteristics through the use of computer models. With the technology acquired
from NaviCyte, Trega developed and released the first of the IDEA-TM- predictive
models, the absorption module. The Company has combined its
Chem.Folio-Registered Trademark- libraries and IDEA predictive models in a
collection of technologies calleD iDiscovery-TM-.
On February 11, 2000, the Company announced that it did not intend to
continue to support internal drug discovery programs, including its melanocortin
receptor programs, that are not funded by a collaborator. Trega believes this
strategic shift will permit it to better focus its efforts and resources on the
continuing development and commercialization of its iDiscovery-TM- technologies.
Trega is currently carrying out a collaborative program in the area of diabetes,
obesity and syndrome X, which is funded by Novartis Pharma AG ("Novartis").
The timing and amounts of revenues from Trega's iDiscovery-TM- technologies,
if any, may be subject to significant fluctuations and therefore the Company's
results of operations for any period may not be comparable to the results of
operations for any other period and may not be indicative of future operating
results. The Company will be required to conduct significant research and
development during the next several years for the development of its predictive
models and through the middle of next year to fulfill its obligations to
Novartis. The Company has been unprofitable since its inception and, while the
Company has set as an objective reaching positive quarterly cash flow by the end
of 2000, the Company is unable to predict when, if ever, it will become
profitable or give assurances
8
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that the Company's positive cash flow objective will be met. As of March 31,
2000, the Company's accumulated deficit was approximately $81.4 million.
RESULTS OF OPERATIONS
First Quarter 2000 Compared With First Quarter 1999
The Company recorded revenues of $2.6 million for the three months ended
March 31, 2000 compared with approximately $2.1 million for the same period in
1999. Revenues increased approximately $500,000, or 24%, over the same quarter
in the prior year. This increase was due primarily to a $1.0 million increase in
revenues from the sale of the Company's Chem.Folio-TM- combinatorial libraries.
Partially offsetting this increase was a decrease in revenues from research
conducted under collaborative research agreements due to the completion of
certain agreements.
As of March 31, 2000, the Company's financial statements reflect a liability
for deferred revenue in the amount of approximately $574,000. This represents
the excess of payments received from research collaborators over the revenue
from libraries and cells shipped or work performed, and will be recognized when
the correlative shipments are made or services are performed or the period for
performance expires.
The cost of sales of $35,000 in the first quarter of 2000 was primarily
related to revenues from the sale of the Company's Chem.Folio-TM- combinatorial
libraries as well as Caco-2 cells, compared to the cost of sales in the first
quarter of 1999 of $59,000, which were primarily related to device sales.
The Company's research and development expenses remained substantially
unchanged for the three months ended March 31, 2000. Costs were primarily
related to increased activity in the Company's Chem.Folio-TM- program as well as
continued development of its iDiscovery-TM- technologies. Any increase was
substantially offset by a decrease in expenses from research carried out to
support internal drug discovery programs.
The Company's selling, general and administrative expenses total
approximately $2.2 million and $1.8 million for the three months ended March 31,
2000 and 1999, respectively. The increase of approximately 21%, was due
primarily to the fact that in June of 1999 Trega began to establish a direct
sales, marketing, and business development organization to support the
distribution of Trega's products and services. In addition, the Company
recognized non-cash amortization expense as a result of an investment in
ChemNavigator.com, Inc., which was not in place during the comparative quarter
last year.
The Company's interest income decreased to approximately $66,000 for the
quarter ended March 31, 2000, compared to $181,000 for the same quarter in 1999.
The decrease was a result of lower cash balances.
Interest expense for the three months ended March 31, 2000 and 1999 was
approximately $121,000 and $67,000, respectively. The increase in interest
expense for the quarter results from obligations related to a line of credit and
additional equipment financing, neither of which were in place during the
comparative quarter last year.
In March 1999, the Company recorded a gain, which did not occur in the
quarter ended March 31, 2000, of approximately $1.5 million in connection with
the sale of the assets of ChromaXome Corp. ("ChromaXome").
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through March 31, 2000, the Company has financed its
activities primarily from public and private sales of equity, funding from
collaborations with corporate partners, sales derived from shipments of
combinatorial libraries or individual compounds, sales of custom peptides and
combinatorial peptide libraries (through its former subsidiary, Multiple Peptide
Systems, Inc. "MPS"), sales of its businesses believed to be no longer strategic
to the Company and interest income. At March 31, 2000, the Company had cash,
cash equivalents and short-term investments aggregating $3.0 million compared to
$6.4 million on December 31, 1999. The Company has invested a significant
portion of its excess funds in cash equivalents and short-term investments
primarily of highly-rated debt instruments of financial institutions and
corporations. (See "Item 3 - Qualitative and Quantitative Disclosure About
Market Risk" below.)
The Company intends to fund a significant portion of its business with
revenues derived from Trega's iDiscovery-TM- technologies that include
Chem.Folio-Registered Trademark- libraries and services and IDEA-TM- predictive
models. The Chem.Folio-Registered Trademark- libraries and services include: (i)
Chem.Folio-Registered Trademark- screening libraries which offer off-the-shelf
compound libraries for immediate screening for compounds active against a
9
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particular biological target or hit finding, (ii) custom synthesis based on
customer templates and chemical motifs, and (iii) rapid creation of chemical
analogues using Chem.Folio's-Registered Trademark- virtual library and
proprietary Tea Bag synthesis technology. Additionally, IDEA-TM- predictive
models are a set of physiologically and structure based computer simulations
that Trega is developing to predict the ADME characteristics of compounds. The
timing and amounts of revenues from Trega's iDiscovery-TM- technologies, if any,
may be subject to significant fluctuations and therefore the Company's results
of operations for any period may not be comparable to the results of operations
for any other period and may not be indicative of future operating results. The
Company has been unprofitable since its inception and the Company is unable to
predict when, if ever, it will become profitable.
The decrease in cash and cash equivalents in the first quarter of 2000
amounted to approximately $3.4 million. Cash used to fund operating activities
of $3.7 million was offset, in part, by $578,000 in proceeds from the Company's
equipment notes payable as well as $672,000 in issuances of the Company's common
stock. Additionally, the Company purchased $543,000 of property and equipment as
well as made $325,000 in principal payments under debt obligations. The amounts
invested in property and equipment were funded, in part, by equipment financing
lines. Although not included in the first quarter of 2000, in April, 2000, the
Company sold approximately 3.7 million newly issued shares of Trega Biosciences,
Inc. common stock to selected institutional and other accredited investors for
approximately $10.1 million in net proceeds. (See "Notes 3 and 5 to the
Company's Consolidated Financial Statements".)
In August 1999, the Company entered into a line of credit in the amount of
$1.5 million that provides funds to be used primarily for working capital
purposes. The line of credit, which is secured by the general assets of the
Company, bears interest at prime plus .75% (9% at March 31, 2000) and is for a
term of one year. The line of credit contains covenants relating to cash flow
coverage and minimum cash balances. As of March 31, 2000, the Company is in
compliance with all debt covenants. In August 1999, the entire line of credit of
$1.5 million was accessed and $1.5 million remains outstanding at March 31,
2000. In connection with the receipt of the line of credit, the Company issued a
warrant to the lender to purchase up to 20,000 shares of the Company's common
stock at $1.75 per share. The warrant expires on August 5, 2004.
In March 2000, the Company obtained an equipment financing line of $600,000,
of which it had accessed approximately $578,000 by March 31, 2000. The loan,
which is secured by certain equipment, bears interest of 13.337% and is to be
repaid monthly over a four-year term. In addition, Trega obtained an additional
equipment financing line of $1.4 million in April 2000. To date, the Company has
not accessed any of this additional line of financing. Once the financing line
is accessed, the loan will be secured by certain equipment and will be repaid
over a four-year term.
In connection with certain other equipment financing lines, the Company must
meet certain financial covenants pertaining to the amount of its cash and
marketable securities to be maintained during the terms of the financing. Due to
certain covenant violations, the Company has provided required security deposits
and therefore has fulfilled its obligations related to the covenants. The
security deposits are included in other assets in the consolidated balance
sheet.
During 1998, the Company moved into a combined research and development
facility and corporate headquarters in San Diego, California. The ten-year lease
covering the facility requires annual rent payments of approximately $1.7
million and is subject to a 3.5% annual escalation clause.
In June 1999, the Company signed a Mutual Release with Dura Pharmaceuticals
("Dura") which releases the parties from certain responsibilities set forth by
the original research agreement signed in February 1996 and terminates the
original research agreement other than in certain limited regards. Under the
original research agreement, the Company was committed to fund $6 million over
four years in a drug discovery and development collaboration using Dura's
proprietary drug delivery technology and Company compounds (such as HP 228). As
of March 31, 2000, the obligation under the Mutual Release with Dura had been
paid by the Company.
The Company intends to use its financial resources primarily to fund
research and development relating to the expansion of its Chem.Folio-Registered
Trademark- combinatorial chemistry library inventories and its IDEA-TM-
computerized predictive models. The amounts actually expended for each purpose
may vary significantly.
Assuming a level of Chem.Folio-Registered Trademark- compound library
revenues for the next twelve months that is comparable to Chem.Folio-Registered
Trademark- compound library revenues in fiscal 1999 (a portion of which is
covered by existing product sales agreements) we anticipate that our existing
capital resources, funding under an existing research and development
collaboration, and our currently available property and equipment financing and
line of credit, will be sufficient to fund our current and planned operations
through the next 12 months. The failure to materialize of any one or more of its
anticipated sources of revenue could have a material adverse impact on us.
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We intend to consider the acquisition or licensing of technologies that will
add value to our iDiscovery-TM- technologies. We anticipate that we will be
required to raise additional capital over a period of several years in order to
acquire such complementary technologies. Such capital may be raised through
additional public or private financings, as well as collaborative arrangements,
borrowings and other available sources. There can be no assurance that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, we may be required to delay, reduce the scope
of, or eliminate our acquisition activities, which could have a material adverse
effect on us.
In March 2000, the Board of Directors, subject to stockholder approval,
reserved an additional 2.5 million shares for issuance under the Company's 1996
Stock Incentive Plan.
OTHER MATTERS
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company spent
less than $100,000 during 1999 in connection with remediating its systems. The
Company is not aware of any material problems resulting from Year 2000 issues,
either with its products, its internal systems or the products and services of
third parties. The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout the Year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
THIS DISCUSSION OF THE COMPANY'S Y2K STATUS CONSTITUTES A "YEAR 2000
READINESS DISCLOSURE" AS THAT ITEM IS DEFINED IN THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT.
RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS,
AMONG OTHERS (INCLUDING THOSE NOTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999), IN SOME CASES HAVE AFFECTED, AND IN THE
FUTURE COULD AFFECT, THE COMPANY'S ACTUAL CONSOLIDATED RESULTS AND COULD CAUSE
THE COMPANY'S ACTUAL CONSOLIDATED RESULTS FOR FUTURE PERIODS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON
BEHALF OF, THE COMPANY.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; IRREGULAR
REVENUE FLOW
We have experienced significant operating losses since inception. For the
years ended December 31, 1999, 1998 and 1997, we had net losses of approximately
$8.7 million, $12.8 million and $9.4 million, respectively. As of December 31,
1999, we had an accumulated deficit of approximately $77.1 million.
We expect that our ability to achieve profitability will be in large part
dependent upon our ability to market and sell our iDiscovery-TM- technologies,
which includes our IDEA-TM- predictive models and Chem.Folio-Registered
Trademark- compound libraries. There can be no assurance that we will be
successful in marketing our products in a manner, including through
collaborative ventures, which will result in additional revenues. Although we
changed our strategic focus to concentrate on the development and marketing of
our iDiscovery-TM- technologies, we still depend in part on revenues from
collaborative arrangements in our internal drug discovery programs. There can be
no assurance that we will be successful in entering into additional
collaboration arrangements that will result in revenues or that we will receive
additional revenues under existing collaboration arrangements in our internal
drug discovery programs. If we are unable to receive significant additional
revenues from our iDiscovery-TM- or internal drug discovery programs, we expect
to incur additional operating losses in the future and expect cumulative losses
to increase as our research and development efforts are expanded. Any revenues
from the achievement of milestones, royalties or license fees from the
discovery, development or sale of a commercial drug by a collaborator are not
expected to be material to our financial position for several years, if at all.
We have been unprofitable since our inception and, while we have set as an
objective reaching positive quarterly cash flow by the end of 2000, we are
unable to predict when, if ever, we will become profitable or give assurances
that our positive cash flow objective will be met.
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As a result of factors affecting our business (including the importance to
us of collaborative arrangements and our inability to control the actions,
timing, funding or success of our current and potential collaborative partners),
our revenues may vary substantially from period to period. In addition, we have
limited experience marketing our first IDEA-TM- module, the absorption module,
which was launched in December 1999. We believe that the absorption module is
the first of its kind. As such, we anticipate that initial customers for the
IDEA-TM- absorption module will wish to perform extensive validation studies.
The sales cycle of such product is therefore unknown. Thus, our results for any
one period may not be indicative of the results that can be expected for any
other period.
NEW AND UNCERTAIN TECHNOLOGIES AND BUSINESS
Drug discovery methods based upon the IDEA-TM- predictive models and
combinatorial chemistry technologies, such as our Chem.Folio-Registered
Trademark- libraries, are new compared to traditional methods of drug discovery.
There can be no assurance that such methods will lead to the discovery or
development of commercial pharmaceutical products or that we will be able to
employ these or other methods of drug discovery successfully. Moreover, our
technology development programs, including certain of the IDEA-TM- modules, such
as metabolism, are at early stages of development or have not yet commenced, and
there can be no assurance that such technology programs will be developed,
employed or commercialized successfully, work efficiently or otherwise enhance
our ability to engage in the acceleration of the drug discovery process. The
efficacy of the IDEA-TM- predictive models, the types of combinatorial libraries
we are capable of offering, the nature of the compounds we are able to
synthesize, and the relative value of any other drug development technologies
that we may be able to provide will, in large part, determine the demand for our
drug discovery capabilities. An inability to offer competitive or commercially
viable predictive technologies or compound libraries or other drug discovery
technologies, or an inability to synthesize compounds that have actual or
potential utility, would have a material adverse effect on us. Failures in the
field of drug discovery, including predictive models and combinatorial
chemistry, could also have a material adverse effect on us.
EARLY STAGE OF PRODUCT DEVELOPMENT
Certain of our technology development programs, including our IDEA-TM-
predictive technologies, may not result in additional products or services that
can be utilized within the foreseeable future, if ever. Although the IDEA-TM-
consortium has validated the IDEA-TM- predictive technologies, potential
customers have not commercially validated them. There can be no assurances that
these programs will be successfully completed or result in products or services
that are efficacious, perceived as valuable by pharmaceutical partners or
customers, useful in our internal development programs or otherwise an
enhancement to our ability to accelerate the drug discovery process.
Our internal drug discovery programs, including our program with respect to
potential drug candidates for the treatment of diseases believed to be mediated
by the melanocortin receptor pathway, are at early stages. We only intend to
proceed with such internal drug discovery programs if, and to the extent,
collaborators fund them. The development of any lead compounds resulting from
our research and development programs, such as HP-228, will be under the control
of our partners. In addition, such compounds are not expected to be commercially
available for a number of years, if ever, even if any such compounds are
successfully developed and are proven to be safe and effective. There can be no
assurances that any of our product development efforts will be successfully
completed, that development arrangements with pharmaceutical partners will be
established on acceptable terms, if at all, that regulatory approvals will be
obtained or will be as broad as sought, that any candidate products will be
capable of being produced in commercial quantities at reasonable cost, or that
any products, if introduced, will achieve market acceptance or profitability.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The commitment of substantial additional funds is required to continue our
development of the IDEA-TM- predictive models and to maintain the
competitiveness of our combinatorial chemistry technologies. Our future capital
requirements will depend on many factors, including, among others: (i) continued
scientific progress in our research and development programs, (ii) the costs
involved in developing and refining the IDEA-TM- predictive models, (iii) the
costs involved in further developing and sustaining internal combinatorial
chemistry, including the Chem.Folio-Registered Trademark- compound libraries,
(iv) the costs involved in developing additional drug discovery technologies,
(v) the revenues generated by the sale and/or licensing of our IDEA-TM-
predictive models and Chem.Folio-Registered Trademark- combinatorial libraries,
(vi) the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, (vii) competing technological and market developments,
and (viii) changes in our existing collaborations. While we have set an
objective of reaching positive quarterly cash flow by the end of 2000, we cannot
provide assurances that such objective will be met. In the event that we are
unable to meet this goal, assuming a level of Chem.Folio-Registered Trademark-
compound library revenues for the next twelve months that is comparable to
Chem.Folio-Registered Trademark- compound library revenues in fiscal 1999 (a
portion of which is covered by existing product sales agreements) we anticipate
that our existing capital resources, funding under an existing research and
development collaboration, and our currently available property and equipment
financing and line of credit, will be sufficient to fund our current and planned
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operations through the next 12 months. The failure to materialize of any one or
more of its anticipated sources of revenue could have a material adverse impact
on us.
We intend to consider the acquisition or licensing of technologies that
will add value to our iDiscovery-TM- technologies. We anticipate that we will
be required to raise additional capital over a period of several years in
order to acquire such complementary technologies. Such capital may be raised
through additional public or private financings, as well as collaborative
arrangements, borrowings and other available sources. There can be no
assurance that additional financing will be available on acceptable terms, if
at all. If adequate funds are not available, we may be required to delay,
reduce the scope of, or eliminate our acquisition activities, which could
have a material adverse effect on us.
DEPENDENCE ON COLLABORATORS
Our strategy for the utilization and development of our drug discovery
technologies, such as the iDiscovery-TM- technologies depends, at least in part,
upon the formation of collaborations and arrangements with corporate
collaborators, licensors, licensees and others. We intend to proceed with our
internal drug discovery programs and the development, clinical testing,
manufacturing and commercialization of any lead compounds only if collaborators
are available to fully fund such programs. There may only be a limited number of
pharmaceutical and biotechnology companies that would potentially collaborate
with us. Historically, pharmaceutical and biotechnology companies have conducted
lead compound identification and optimization within their own research
departments, due to the highly proprietary nature of the activities being
conducted, the central importance of these activities to their drug discovery
and development efforts and the desire to obtain maximum patent and other
proprietary protection on the results of their internal programs. Pharmaceutical
and biotechnology companies must be convinced that our drug discovery
technologies and expertise justify outsourcing these programs to us. The amount
and timing of resources that current and future collaborators, if any, devote to
collaborations with us are not within our control. There can be no assurance
that such collaborators will perform their obligations as expected or that we
will derive any additional revenue from such arrangements. Because our
arrangements with our collaborators may entail the provision of identical or
similar libraries, or compound technologies or information to multiple parties,
there can be no assurance that conflicts will not arise between collaborators as
to proprietary rights to particular libraries or particular compounds in our
libraries. Moreover, our collaborations and licenses may be terminated under
certain circumstances by the other parties thereto, which terminations could
result in us relinquishing rights to products, if any, developed jointly with
our collaborators. Any such conflicts or terminations could have a material and
adverse effect on us.
There can be no assurance that (i) our present or any future collaborators
will not pursue their existing or alternative technologies in preference to
ours, (ii) any product will be developed and marketed as a result of such
collaborations or (iii) we will be able to negotiate additional collaborative
arrangements in the future on acceptable terms, if at all, or that such current
or future collaborative arrangements will be successful. To the extent that we
choose not to or are unable to establish such arrangements, (i) it will require
substantially greater capital to undertake the research, development and
marketing of products, such as our IDEA-TM- predictive models and
Chem.Folio-Registered Trademark- libraries, at our own expense and (ii) in the
case of our internal drug discovery programs, we will not pursue the
continuation of such programs. In addition, we may encounter significant delays
in developing compounds or find that the development, manufacture or sale of our
proposed products is materially and adversely affected by the absence of such
collaborative agreements.
COMPETITION
We are engaged in a highly competitive and rapidly changing industry. Our
IDEA-TM- predictive models compete not only with the products of other
predictive modeling companies, but also companies employing more mature and
established technologies, including cell-based and animal testing technologies.
Our combinatorial chemistry business competes with other combinatorial chemistry
companies and companies that may utilize other technologies for the same
objectives. Competition from fully integrated pharmaceutical companies,
biotechnology companies and other drug discovery companies is intense and is
expected to increase. Many pharmaceutical and biotechnology companies, which
represent the largest potential market for our predictive models, combinatorial
chemistry and other drug discovery technologies, have developed or are
developing internal predictive modeling and/or combinatorial chemistry programs
or have entered into collaborations with companies conducting such programs.
Many of these pharmaceutical and biotechnology companies, as compared with us,
have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical and clinical testing, obtaining
regulatory approvals and marketing. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical and established biotechnology companies. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, seek patent protection and establish
collaborative arrangements for products and clinical development and marketing
which may be competitive with our efforts. These companies and institutions
compete with us in recruiting and retaining highly qualified management,
scientific, software development and other personnel. There is also competition
for access to novel
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pharmacophores, and any inability by us to develop novel pharmacophores would
have a material adverse effect on us. There can be no assurance that our
competitors will not develop more effective or more affordable technology or
products, or achieve earlier product development and commercialization than us,
thus rendering our technologies and/or products obsolete, non-competitive or
uneconomical.
A number of companies have indicated that they have developed or are
developing predictive models. We are aware of one company that has launched a
product that might be competitive with the IDEA-TM- predictive models. We
believe that the principal competitive factors affecting our market in the
predictive modeling industry include performance, price, ease of use, product
reputation, patent position, quality, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although we
believe that we currently compete favorably with respect to such factors, there
can be no assurance that we can maintain such a position against current or
potential competitors in the predictive modeling industry.
In combinatorial chemistry and other drug discovery technologies, we face
competition based on a number of factors, including price, size, diversity of
libraries, ease of use of libraries, purity, target specificity, speed and costs
of identifying and optimizing potential lead compounds, access to novel
pharmacophores, patent position and the ability to provide drug discovery
technologies desired by or useful to potential partners. In view of the
competitive nature of our industry, we expect to face continued and substantial
downward pressure on the prices that we are able to charge for our products and
services.
In addition, products and therapies that will compete directly with any
compounds that we seek to develop (such as HP-228), or that our collaborative
partners may seek to develop, currently exist or are being developed. In product
development and marketing, we and our collaborative partners will face
competition based on product efficacy and safety, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent position.
PATENTS AND PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain patents for our
methodologies and the compounds and other products, if any, resulting from the
application of such methodologies, defend patents once obtained, maintain trade
secrets and operate without infringing upon the proprietary rights of others,
both in the U.S. and in foreign countries. The patent positions of
pharmaceutical and biotechnology companies, and companies utilizing drug
discovery technologies such as predictive modeling and combinatorial chemistry
(including us), are uncertain and involve complex legal and factual questions
for which important legal principles are largely unresolved. There can be no
assurance that we will develop or obtain the rights to products or processes
that are patentable, that patents will issue from any of the pending
applications or that claims allowed will be sufficient to protect our
technologies or products. Pending patent applications for which rights are
uncertain include applications being prosecuted by us with respect to our
IDEA-TM- predictive technologies, combinatorial chemistry libraries and certain
uses for HP-228. There can be no assurance that our patents of, or with respect
to which rights have been licensed to us, will not be challenged, invalidated or
circumvented, or that the rights granted or licensed to us will provide us with
proprietary protection or competitive advantages. Such patents include a U.S.
patent for the Tea Bag technology, which is licensed to us, and our U.S. patent
for the composition of matter of HP-228 and certain uses of HP-228. The U.S.
patent on the Tea Bag technology, that we believe is important to our business,
expires in 2003. Competitors (some of which have, or are affiliated with
companies having, substantially greater resources than us) may have filed
applications, may have been issued patents or may obtain additional patents and
proprietary rights to or the use of certain methodologies relating to products
or processes competitive with ours or which could block our efforts to obtain
patents or conduct our business.
A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received patents in
the fields of combinatorial chemistry and other drug discovery technologies and
with respect to products and therapies that may have potential uses which are
similar to the our current research and development areas. Our commercial
success will depend in part on not infringing patents and not breaching the
patent and know-how licenses upon which any of our technologies or compounds is
based or having such licenses breached or terminated by others. Certain patent
applications or patents may conflict with our patent applications and patents
either by claiming the same methods or compounds or by claiming methods or
compounds that would dominate ours. A U.S. patent application is maintained
under conditions of confidentiality while the application is pending in the U.S.
Patent and Trademark Office ("PTO") so that we cannot determine the inventions
being claimed in pending patent applications filed by our competitors in the
PTO. Any such conflicts could result in a significant reduction of the coverage
of our issued or licensed patents and our ability to obtain issuance of
significant patent protection from our applications. In addition, if patents are
issued to other companies that contain competitive or conflicting claims, we may
be required to obtain licenses to these patents or to develop or obtain
alternative technology. If any license is required, there can be no assurance
that we will be able to obtain any such license on commercially favorable terms,
if at all. If such licenses are not obtained, we could be prevented from
pursuing the development or commercialization of our technologies or potential
products. Our breach of an existing license or failure
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to obtain a license to any technology that we may need to commercialize our
technologies or potential products may have a material adverse impact on us.
Litigation, which could result in substantial costs to us, may also be
necessary to enforce any patents issued or licensed to us or to determine the
scope and validity of third party proprietary rights. There can be no assurance
that our issued or licensed patents would be held valid by a court of competent
jurisdiction or that an alleged infringer would be found to be infringing.
Further, with respect to certain technology in-licensed by us, we do not have
the right to control any litigation with respect to such technology. An adverse
outcome could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require us to cease using
such technology, any of which could have a material adverse effect on us.
Moreover, merely the uncertainties resulting from commencement and continuation
of any technology-related litigation could have a material adverse effect on our
ability to compete in the marketplace or raise capital, pending resolution of
the disputed matters. If our competitors prepare and file patent applications in
the U.S. that claim technology also claimed by us, we may have to participate in
interference proceedings declared by the PTO to determine the priority of the
invention, which could result in substantial cost to us, even if the outcome is
favorable to us. An adverse outcome could subject us to significant liabilities
to third parties and require us to license disputed rights from third parties or
discontinue using the technology.
We also rely on trade secrets to protect technology, especially where patent
protection is not believed to be appropriate or obtainable. We attempt to
protect our proprietary technology and processes in part through confidentiality
agreements with our employees, consultants and certain contractors. There can be
no assurance, however, that these agreements will not be breached or terminated,
that we would have adequate remedies for any breach, or that our trade secrets
will not otherwise become known or be independently discovered by competitors.
We, as well as our consultants and research collaborators in their work for us,
use intellectual property owned by others. Disputes may arise as to the rights
in technology resulting from collaborations and in the related know-how and
inventions. We rely on certain technologies to which we do not have exclusive
rights or which may not be patentable or proprietary and thus may be available
to competitors.
CACO-2 CELL LICENSES
We presently receive a limited amount of revenues from the sale by us of
non-exclusive Caco-2 cell licenses. Although we believe that the Caco-2 cell
line is currently the most widely used cell line for in-vitro estimation of the
oral absorption of compounds, there can be no assurances that third parties will
continue to use such cells or seek to license related rights or acquire Caco-2
cells or any derivatives from us. Furthermore, we are aware that certain third
parties are claiming the right to use Caco-2 cells without a license from us.
The enforcement of our rights would require litigation.
MANAGEMENT AND EMPLOYEES
Our success will depend upon the effective management of our drug discovery
technologies and capabilities and current and prospective collaborative
relationships, including maintaining confidentiality of the research being
provided for collaborators as well as the maintenance and further development of
our technologies in our research and development programs. We are highly
dependent on the principal members of our management, scientific and software
development staff, the loss of whose services might adversely impact the
achievement of our goals. To further develop our technologies (including our
IDEA-TM- predictive models and combinatorial chemistry), and to pursue our
product development plans, we will be required to hire additional qualified
scientific personnel to perform research and development, as well as personnel
with software development expertise. These requirements, as well as the
management of current and prospective collaborative arrangements, are expected
to demand the addition of management personnel and the development of additional
expertise by existing management personnel. There is currently a shortage of
skilled candidates, which is likely to continue. As a result, competition for
skilled personnel by pharmaceutical, biotechnology and software companies,
universities, and other research institutions is intense, and the turnover rate
can be high. Failure to recruit and retain personnel could impair our ability to
develop products and services and to pursue additional collaborations.
GOVERNMENT REGULATION
The manufacturing and marketing of certain products developed by our
collaborators or us will be subject to regulation for safety and efficacy by
governmental authorities in the U.S. and other countries. In the U.S.,
pharmaceuticals are subject to rigorous regulation by the Food and Drug
Administration ("FDA"). The Federal Food, Drug and Cosmetic Act and the Public
Health Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of pharmaceutical
products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
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The steps required before a pharmaceutical agent may be marketed in the U.S.
include (i) preclinical laboratory and animal tests, (ii) submission to the FDA
of an Investigational New Drug application ("IND"), which must be deemed
acceptable before human clinical trials may commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (iv) submission of a New Drug Application ("NDA") or Product License
Application ("PLA") to the FDA and (v) FDA approval of the NDA or PLA prior to
any commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic drug manufacturing facility is subject
to inspections every two years by the FDA and must comply with current Good
Laboratory Practices and Good Manufacturing Practices ("GMP"). To supply
products for use in the U.S., foreign manufacturing facilities also must comply
with GMP and are subject to periodic inspection by the FDA or by regulatory
authorities in such countries under reciprocal agreements with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND and, unless the FDA objects, the company submitting the IND may
start clinical studies 30 days following its submission to the FDA.
Clinical trials involve the administration of the pharmaceutical product to
volunteers or to patients identified as having the condition for which the
pharmaceutical is being tested. The pharmaceutical is administered under the
supervision of a qualified principal investigator. Clinical trials are conducted
in accordance with protocols previously submitted to the FDA as part of the IND
which detail the objectives of the study, the parameters used to monitor safety
and the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") at the institution
at which the study is conducted. The IRB considers, among other things, ethical
factors, the safety of the human subjects and the possible liability risk for
the institution.
Clinical trials are typically conducted in three sequential phases that may
overlap. Phase I consists of the initial introduction of the pharmaceutical into
human volunteers, and the emphasis is on testing for safety (adverse effects),
dosage tolerance, absorption, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a limited patient population to
determine the efficacy of the pharmaceutical for specific targeted indications,
to determine dosage tolerance, optimal dosage and dosing frequency, and to
identify possible adverse side effects and safety risks. Once a compound is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to further evaluate both clinical
efficacy and safety within an expanded patient population at multiple clinical
study sites. The FDA reviews both the clinical plans and results of the trials
and may order suspension of the trials at any time if there are significant
safety issues.
Results of the preclinical and clinical trials are submitted to the FDA in
the form of an NDA or PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort, and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including severity of the
disease, availability of alternative treatments, and risks and benefits
demonstrated in clinical trials. Additional animal studies or clinical trials
may be requested during the FDA review process and may delay marketing approval.
After FDA approval for the initial indications, further clinical trials are
necessary to gain approval for use of the product for any additional
indications. The FDA may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense. Failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations could
have a material adverse effect on this industry.
For marketing outside the U.S., we and our collaborators will also be
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for pharmaceutical products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country.
With respect to any potential products that enter clinical trials (such as
HP-228), there can be no assurance that our collaborators will be permitted to
continue or undertake new human clinical testing of such potential products, or,
if permitted, that such potential products will be demonstrated to be safe and
efficacious. Our lead compounds, or those of our collaborators, may prove to
have undesirable and unintended side effects or other characteristics that may
prevent or limit their commercial use. In addition, there can be no assurance
that any of our potential products or those of our collaborators will ultimately
obtain FDA or foreign marketing approval for any indication, that an approved
compound will be capable of being produced in commercial quantities at
reasonable cost or that any such compound will be successfully marketed.
Furthermore, even if approval is ultimately obtained, delays in the approval
process could have a material adverse effect on us.
In addition to regulations enforced by the FDA, we are also subject to other
regulation, including regulation under the Occupational Safety and Health Act,
the Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, regulations promulgated by the United States
Department of Agriculture, and other federal, state and local laws and
regulations.
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MANUFACTURING
We have no manufacturing facilities for our pharmaceutical products and will
need to rely on our collaborators or contract manufacturers to produce these
items (including any compounds for clinical trials and commercialization). Our
products under development have never been manufactured on a commercial scale
and there can be no assurance that such products can be manufactured at a cost
or in quantities necessary to make them commercially viable. Moreover, contract
manufacturers must adhere to GMP regulations enforced by the FDA through its
facilities inspection program. If these facilities cannot pass a pre-approval
plant inspection, the FDA pre-market approval of the products will not be
granted.
RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE
Our business may expose us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic
products and other facets of the drug development process. We do have product
liability insurance, but there can be no assurance that we will be able to
maintain such insurance on acceptable terms or that this insurance will provide
adequate coverage against potential liabilities. We also have clinical trial
liability insurance, but there can be no assurance that we will be able to
maintain such insurance for any of our clinical trials or that such insurance
will provide adequate coverage against potential liabilities.
POTENTIAL LIABILITY REGARDING HAZARDOUS MATERIALS
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. We are subject
to federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products. The
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, we could be held liable
for any damages that result and any such liability could exceed our resources.
In addition, there can be no assurance that we will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for securities of life sciences companies have been highly
volatile and the market has experienced significant price and volume
fluctuations, some of which are unrelated to the operating performance of
particular companies. Announcements of technological innovations or new
commercial products or failures of potential products by us, our collaborators
or our competitors, developments in our relationships with current or future
collaborative partners, developments concerning proprietary rights, including
patents and litigation matters, publicity regarding actual or potential results
with respect to compounds under development by us or our collaborators,
regulatory developments in both the U.S. and foreign countries, public concern
as to the efficacy of predictive models, combinatorial chemistry or other new
drug discovery technologies, changes in reimbursement policies, general market
conditions, as well as quarterly fluctuations in our revenues and financial
results and other factors, may have a significant impact on the market price of
our Common Stock. In particular, the realization of any of the risks described
in these "Risk Factors" may have a material adverse impact on such market price.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW
Our Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the Board of Directors to issue, without stockholder
approval, 5,000,000 shares of preferred stock with voting, conversion and other
rights and preferences that could adversely affect the voting power and other
rights of the holders of our Common Stock. Although we have no current plans to
issue any shares of preferred stock, the issuance of preferred stock or of
rights to purchase preferred stock could be used to discourage an unsolicited
acquisition proposal. In addition, the possible issuance of preferred stock
could discourage a proxy contest, make more difficult the acquisition of a
substantial block of our Common Stock or limit the price that investors might be
willing to pay in the future for shares of our Common Stock. Our Certificate of
Incorporation provides for staggered terms for the members of the Board of
Directors. A staggered Board of Directors and certain provisions of our by-laws,
Certificate of Incorporation and Delaware law applicable to us could delay or
make more difficult a merger, tender offer or proxy contest involving us. In
addition, we are subject to Section 203 of the General Corporate Law of Delaware
which, subject to certain exceptions, restricts certain transactions and
business combinations between a corporation and a stockholder owning 15% or more
of the corporation's outstanding voting stock (an "interested stockholder") for
a period of three years from the date the stockholder becomes an interested
stockholder. These provisions, and certain other provisions of the Certificate
of Incorporation and our by-laws, may have the effect of delaying or
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preventing a change of control of the Company without action by the stockholders
and, therefore, could adversely affect the price of our Common Stock.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM
We expect that significantly all of our revenues in the foreseeable future
will be derived from products and services provided to the pharmaceutical and
biotechnology industries. Accordingly, our success in the foreseeable future is
directly dependent upon the success of the companies within those industries and
their continued demand for our products and services. The levels of revenues and
profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce the costs of
health care through various means and the initiatives of third party payors with
respect to the availability of reimbursement. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
governmental control. In the U.S., there have been, and we expect that there
will continue to be, a number of federal and state proposals to implement
similar governmental control. It is uncertain what legislative proposals may be
adopted or what actions federal, state or private payors for health care goods
and services may take in response to any health care reform proposals or
legislation. To the extent that such proposals or reforms have a material
adverse effect on the business, financial condition and profitability of
pharmaceutical or biotechnology companies that are actual or prospective
customers for our products and services, our market value, access to financing,
business, financial condition and results of operations could be materially and
adversely affected.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
available for sale securities. The Company invests its excess cash in highly
liquid short-term investments that are typically held for the duration of the
term of the respective instrument. The Company does not utilize derivative
financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions to manage exposure to interest
rate changes. Accordingly, the Company believes that, while the securities the
Company holds are subject to changes in the financial standing of the issuer of
such securities, the Company is not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31,
2000.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Trega Biosciences, Inc.
Date: May 15, 2000 /s/ Michael G. Grey
----------------------------------
Michael G. Grey
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard A. Wills
----------------------------------
Gerard A. Wills
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT MARCH 31, 2000 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000887920
<NAME> TREGA BIOSCIENCES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,017
<SECURITIES> 996
<RECEIVABLES> 1,149
<ALLOWANCES> 10
<INVENTORY> 0
<CURRENT-ASSETS> 4,684
<PP&E> 8,740
<DEPRECIATION> 4,351
<TOTAL-ASSETS> 18,261
<CURRENT-LIABILITIES> 7,036
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 7,995
<TOTAL-LIABILITY-AND-EQUITY> 18,261
<SALES> 39
<TOTAL-REVENUES> 2,590
<CGS> 35
<TOTAL-COSTS> 6,649
<OTHER-EXPENSES> 186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> (4,300)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
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<NET-INCOME> (4,300)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
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